Why Are New U.S. Nuclear Reactor Projects Fizzling?

The usual obstacles -- regulatory and financial risk -- haven't been eliminated by last year's initiative

About a year ago, President Obama announced a new initiative to encourage the construction of a new generation of nuclear energy reactors. The plan sought to provide $55 billion in loan guarantees for these projects. Matthew Wald of the New York Times provides a progress report today: there hasn't been much. Two are moving forward, and the others are struggling. What's the holdup?

The Times explains that the issues they're grappling with won't sound new to those who understand the nuclear power industry:

But some obstacles are specific to the nuclear industry, like the ballooning cost estimates for construction of reactors, which are massive in scale. Even when projects are identified as prime candidates for federal loan guarantees, some investment partners turn wary.

"All that uncertainty creates an incentive for you to wait," said Joseph E. Aldy, who was a special assistant to President Obama until December.

To counter the uncertainties, Senator (Lamar) Alexander and others have arranged substantial help for the industry. The Nuclear Regulatory Commission has been working for more than 15 years to streamline reactor licensing to cut construction time and to reduce risk. And the 2005 Energy Policy Act provided money for loan guarantees, subsidies for production from the first few reactors and insurance against regulatory delays.

If you read between the lines, there are two factors preventing these reactors from moving forward. One is regulatory uncertainty. The other is financial uncertainty.

Regulatory Uncertainty

It seems like regulation shouldn't be an obstacle at all. The government is broadly in favor of more reactors, so why would it get it its own way? Unfortunately, it isn't that simple. Much of this regulation you can't simply shrug off. After all, if all of the safety rules aren't perfectly met, and a meltdown occurs, the government hardly wants to be seen as responsible because it shrugged off the regulation.

With that said, if the government is really serious about more nuclear power, then it should be guiding these energy companies through the regulatory process to ensure that the rules don't create any unnecessary delays. There's a difference between the government helping firms to cope with and understand regulations and helping them to ignore regulations. If regulation is really an obstacle, then the government should do more to ensure that it isn't preventing more reactors from getting built.

Financial Uncertainty

One of the big problems with nuclear power is the enormous upfront cost. These reactors are extremely expensive to build. While the returns may be very great, they're also very slow. It can sometimes take decades to recoup initial costs. Since many investors have a short attention span, they don't like to wait that long for their investment to pay off.

The costs are also sometimes volatile, according to the NY Times piece. So you've got a situation where investors finally agree to endure a project with a long time-horizon for break-even, and then the costs go up. It's pretty easy to see why they would be unhappy.

But that's not all: at this time, other forms of energy are relatively cheap. Natural gas is plentiful and inexpensive. So it's hard for energy companies to sell a future source of nuclear energy when present sources are doing the trick for cheap.

If you add all that together, you have a very difficult formula for getting more nuclear reactor projects off the ground. That last problem, in particular, isn't exclusive to nuclear, however. Solar and wind also suffer from being relatively expensive. In time, as fossil fuels become more limited in supply, their prices will rise. But by then, if the U.S. doesn't have an energy infrastructure in place to utilize other sources like nuclear, solar, and wind, the economy will be adversely affected as energy prices rise with insufficient energy available from alternatives.

There's no clear solution to this problem other than even more aggressive intervention by the government. The current struggles to build new reactors appear to show that loan guarantees aren't enough. Bigger subsidies might also be necessary to get investors to stomach the high upfront costs and slow returns of nuclear reactors. Perhaps a public-private investment vehicle would be helpful. If we wait on the market to come around, it will likely be too late, as energy prices will already be increasing quickly as fossil fuel supplies shrink.